Brent crude made a new 13-month low on Monday around $53.11 on news that potentially deeper OPEC cuts may not occur soon. The spreads in the futures markets are signaling weaker demand, with the discount on spot prices widening further. This year, Brent crude has dropped by more than 18% and by 25% from its January peak of $71.75.
2020 was supposed to put an end to the global manufacturing slump after the US and China reached their “phase one” trade agreement. It was expected that Europe would begin to shine again due to renewed Chinese demand after the signing of the trade deal. But no one expected a coronavirus outbreak that would interrupt economic activity in China and spread globally.
Now it’s no longer a question of whether the coronavirus epidemic will lead to an economic slowdown, but how painful this slowdown will be. The scale of the impact can only be determined when the spread of the virus begins to slowdown and the outbreak gets under control, which is not the case at the moment.
Chinese companies were supposed to return to work on Monday, but many car plants and other manufacturers have remained closed following the new year holiday. State refiners such as PetroChina, Sinopec Corp and CNOOC have all announced cuts to their refinery runs totaling approximately 940,000 barrels per day. In fact, this number will be much bigger if you take into account independent refiners.
Given that China’s oil demand has fallen by more than three million barrels a day, the country may need to cut imports for several months to come. Until then, supertankers may need to store oil, which means inventories will begin to build-up excessively.
That’s why OPEC may need to make a quick decision very soon to prevent prices from slumping further. Russia seems to be the main obstacle against cutting production at this stage. But if the coronavirus continues to spread and we don’t see a response from the cartel, expect oil prices to remain in a freefall.
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